Introduction to the financial world
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Introduction to the Financial World. Corporate Finance 2. The financial world. Explain the role of the financial manager Detail the value of financial intermediaries Show an appreciation of the function of the major financial institutions and markets. Primitive and modern economies.

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Introduction to the Financial World

Corporate Finance 2


The financial world

  • Explain the role of the financial manager

  • Detail the value of financial intermediaries

  • Show an appreciation of the function of the major financial institutions and markets


Primitive and modern economies

Exhibit 1.14 Flows within a simple economy – production level

Exhibit 1.15 Flows within a simple economy – production level plus money


Flows within a modern economy

Exhibit 1.16 Flows within a modern economy


The role of the financial manager

Exhibit 1.17 The flow of cash between capital markets and the firm’s operations


The financial manager plays a pivotal role in the following:

  • Interaction with the financial markets

  • Investment

  • Treasury management

  • Risk management

  • Strategy


The flow of funds and financial intermediation

Exhibit 1.20 The flow of funds and financial intermediation


The flow of funds and financial intermediation

  • Primary investors

  • Ultimate borrowers

  • Conflict of preferences


Savings into investment in an economy without financial intermediaries


The introduction of financial intermediaries

  • Brokers

  • Asset transformers

    • Risk transformation

    • Maturity (liquidity) transformation

    • Volume transformation

  • Intermediaries’ economies of scale

    • (a)Efficiencies in gathering information

    • (b)Risk spreading

    • (c)Transaction costs

  • Financial markets


Savings into investment in an economy with financial intermediaries and financial markets


Growth in the financial services sector

  • Reasons for growth of financial services in the UK

    • 1High income elasticity

    • 2International comparative advantage

Exhibit 1.24 Main features of change in financial services


The financial system: the banking sector

  • Retail banks

  • Wholesale banks

    • Raising external finance for companies

    • Broking and dealing

    • Fund management (asset management)

    • Assistance in corporate restructuring

    • Assisting risk management using derivatives

  • International banks

    • Foreign banking

    • Eurocurrency banking

  • Building societies

  • Finance houses


The financial system: long-term savings institutions

  • Pension funds

    • The long time horizon of the pension business means that large sums are built up and available for investment – currently over £800bn

  • Insurance funds

  • General insurance

  • Life assurance

    • Term assurance, whole-of-life policies,

    • Endowment policies, annuities

  • Life assurance companies have over £900bn under management


The financial system: the risk spreaders

  • Unit trusts

  • Investment trusts

  • Open-ended investment companies (OEICs)


The financial system: the markets

  • The money markets

  • The bond markets

  • The foreign exchange markets (Forex or FX)

  • The share markets

  • The derivative markets


Lecture review 1

  • Financial institutions and markets

  • Financial managers

  • Financial institutions

  • Asset transformation

  • Intermediaries and economies of scale

  • Secondary markets

  • Financial services sector


Lecture review 2

  • The financial system

  • The banking sector

  • Long-term savings institutions

  • The risk spreaders

  • The markets


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